When purchasing Bitcoin on-chain from a centralised exchange, your personal details and transaction addresses are at risk of being leaked, either through a hack or an internal breach. This can expose your Bitcoin holdings and spending habits to prying eyes. Since Bitcoin operates on a public ledger, the movement of coins is visible, potentially linking back to your personal information.

However there are several options to enhance your privacy and mitigate the risk of your Bitcoin transactions being tracked. One of the easiest, quickest, and cheapest methods is using the Bitcoin Lightning Network. The Lightning Network can break the connection between your coins on the public ledger, offering a robust way to anonymise your transactions and ensure forward-looking privacy.

In this guide, we will use Phoenix Wallet and Boltz.Exchange to achieve this.

Caveats & Trade-offs

The method described in this article is aimed at breaking the on-chain connection between your coins as purchased on a KYC exchange by using the Lightning Network. Custodial Lightning accounts (like Wallet of Satoshi) may log transaction and personal data separately. Also sophisticated network analysis of lightning channels and routing paths can also take place. If this in your threat model you may need to look at alternative techniques such as CoinJoins.

Additionally understand how to use coin control and coin labelling and avoid reusing addresses. Consider creating an entirely new wallet for receiving your coins to as any mixing of old and new coins will expose your history again.

Requirements

A self-custodial Lightning wallet is important, though not strictly necessary. While this technique is possible with custodial Lightning accounts, there are issues regarding the privacy and integrity of these account-based systems, and the fees can also be quite high for large transfers.

The self-custodial Phoenix Wallet is a good option for its easy user experience and open-source code.

Setting Up a Self-Custodial Wallet

Download Phoenix Wallet: Follow the initial backup procedure by writing down your 12-word seed phrase offline on paper and storing it in a secure location (do not take a photo of this or type it into a computer).

See this video guide by BTC Sessions to setup Phoenix Wallet

Understanding Liquidity

One consideration with a self-custodial Lightning wallet is managing the liquidity of your Lightning channel. Although this has become easier, receiving an amount larger than your current liquidity will require an additional on-chain transaction to increase your available liquidity.

The process in the guide will grow your channel liquidity as you continue to move funds through Phoenix, meaning you can receive larger and larger Lightning transactions without paying additional fees.

Learn more about Liquidity here.

Using Boltz.Exchange

Boltz.exchange is a non-custodial Bitcoin bridge that lets you swap between different Bitcoin layers while staying in full control. The service is open-source and Bitcoin-only.

Boltz.exchange uses submarine swaps (a form of atomic swap) between Lightning Bitcoin, Liquid Bitcoin, and on-chain Bitcoin. An atomic swap ensures that transactions are cryptographically dependent on each other in a time-locked transaction. The service does not have custody of your funds.

Boltz.exchange currently has a minimum of 100,000 sats for Lightning to on-chain swaps and maximum of 25,000,000 Sats.

In the case of some kind of issue with the transaction your funds are not at risk:

• Lightning to On-Chain Transactions: If there is a payment failure (e.g., a Lightning network routing issue), the transaction will not complete and no funds will move.
• On-Chain to Lightning Transactions: In case of routing issues on the receiving end, the time-locked transaction will expire and the funds can be refunded through the Boltz.Exchange refund process.

Making the Swap

1. Receive your on-chain coins into Phoenix Wallet from your current wallet.
2. Generate a new on-chain Bitcoin address in your destination wallet.
3. Use Boltz.Exchange: Swap from Lightning to the new on-chain address.

It's that simple!

About the Fees

There will be an on-chain fee to go from your original wallet to Phoenix, as well as a network fee and service fee for using Boltz.Exchange. However if you keep an eye on mempool.space you can make the transaction at a time when fees are low.